Econ 1101 1st Edition Lecture 14 Outline of Last Lecture I Price Ceilings a Rationing II Cap and Trade Outline of Current Lecture II Positive and Negative Externalities III Graphically Depicting Externalities Current Lecture An externality arises when a person engages in an activity that influence the well being of a bystander and yet neither pays nor receives any compensation for the effect example smelling cookies or a fart Negative Externalities Cigarette smoking second hand smoke Driving cars Global warming from carbon and congestion on roads Noise planes cell phones Stinky Tofu Positive Externalities Maintenance of home exterior Research Can imitate or build off of Studying hard in Econ 1101 Private benefit or benefit to friend Big Idea So far we have only talked about private benefits Private marginal cost supply and Private Marginal Benefit demand Externalities are the social benefits or cost Social Marginal cost and Social Marginal Benefit These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute When no externalities only buyers and sellers are affected With negative and positive externalities everyone is affected When no externalities Social Marginal Cost SMC Private Marginal Cost PMC aka the supply curve when there is no negative externalities Social Marginal Benefit SMB Private Marginal Benefit PMB aka the demand curve when there is no positive externalities When externalities SMC PMC External Cost per Unit EC SMB PMB External Benefit per Unit EB Back to First Welfare Theorem Free market q is where PMB PMC Socially Pareto Efficient quantity is where SMB SMC When EC 0 and EB 0 These are the same thing Subsidize if there are positive externalities to increase quantity Q free market Q socially efficient First Welfare Theorem EXAMPLE Stinky Tofu society wants less because it smells but free market doesn t see that EC is too big EC 0 so it is NOT efficient Cookies society wants more because they smell good but free market doesn t see that EB is too big EB 0 so it is not efficient The output of cookies is too small Externalities is NOT a shift in the supply or demand curve Markets DO NOT see externalities because they are a social aspect
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